Seven deadly financial sins to avoid this year

Committing the seven deadly financial sins made life hell for many businesses during last year's recession.

Discipline will be needed to avoid an eighth transgression: assuming that this year will revert to "normal".

Every business's New Year's resolution should be to learn from the events of last year and avoid the seven sins this year.

These are:

1. PLANNING WITH ONE SET OF NUMBERS

Using only one set of numbers for financial planning creates the risk of being caught by surprise if what eventuates differs wildly from central assumptions. This applies both to financial markets and to business volumes. Effective financial risk management planning involves:

* Being prepared and accepting there will be variances.
* Planning for "what if" scenarios.
* Stress-testing the plans.
* Assuming the worst for market volatility.

2. BREAKING THE RULES

Failing to have an effective treasury policy - and sticking to it - can result in potentially risky knee-jerk responses to issues. Focus on identifying, managing and mitigating financial risks by:

* Reviewing policies at least biennially (and immediately after any significant business change).
* Sticking to the policy under all market conditions, favourable or unfavourable.
* Never changing policy in response to market movements, but only if the nature of the risk in the business has changed.

3. FAILING TO USE ALL AVAILABLE RISK MANAGEMENT TOOLS

It is false economy to avoid using risk management tools such as options and interest rate swaps because a short-term saving could result in a long-term cost.

Businesses with exposure to financial markets can reduce their risks and gain certainty by:

* Using all available risk management tools, such as options and interest rate swaps.
* Investing the time to understand how these tools work and how to administer and account for them.
* Including hedging as an inherent business cost (akin to insurance) e.g. by budgeting a line item for option premiums.

4. NEGLECTING FORWARD PLANNING FOR FUNDING FACILITIES

Too many businesses under-estimate how long it can take to conduct refinancing negotiations with their banks.

Savvy businesses ensure funding is available when needed by:

* Contacting their bank at least six months in advance of the facility expiring - or up to 12 months ahead if the existing facilities are more complex.
* Working closely with the bank in the early stages to avoid surprises.
* Maintaining effective communication with the bank and ensuring that expectations are mutually understood.

5. EXCLUDING RISK CREATORS FROM THE RISK ANALYSIS PROCESS

Risk creators are staff such as sales people and buyers whose roles have a direct impact on a business's bottom line.

Ensure risk creators become reward generators by:

* Increasing the internal profile of the business's risk management and treasury functions.
* Ensuring risk creators understand the risk and treasury framework and base decisions on that framework.
* Maintaining regular communication with the treasury functions.

6. FAILING TO UNDERSTAND AND MANAGE CASH FLOW

"We've always done it this way" are six words that should ring alarm bells when reviewing a business's cash flow management systems. Something that appears to be working can usually be further streamlined and improved. Keeping cash flowing requires discipline and fresh thinking by:

* Understanding in detail the process of how cash enters and exits an organisation.
* Being more critical of internal cash management processes.
* Allocating sufficient resource, time and energy towards "best in class" cash flow management performance (the savings will outweigh the investment in most cases).

7. TAKING ADVICE FROM A SINGLE SOURCE

Many businesses use their bank as their default financial adviser.

While there is nothing wrong with that, this only provides one perspective with no guarantee the advice is correct. Other sources may have different views.

A better financial risk management strategy is to:

* Use independent advisers from a range of disciplines.
* Keep up to date with local and international economic news and market movements.

Peter Cavanaugh is senior client adviser at independent financial risk management advisers Bancorp Treasury Services.